Why China Is Such an Important Market for Hershey in 2015

The Hershey Company (HSY) is a major player in the US confectionery industry (XLP) (IYK) with aims for big growth on the international stage. According to Euromonitor, the confectionery industry in China experienced a CAGR (compound annual growth rate) of 9.4% between 2010 and 2014, reaching $15.2 billion in 2014. Analysts expect the Chinese confectionery market to grow at a CAGR of 7% in coming five years.

In 2014, Mars led the confectionery industry in China, with a market share of 39%. Both Ferrero and Hershey accounted for 12% market shares in China. Barry Callebaut (BYCBY) expects Asia, mainly China and India to contribute 25% of its revenue over 20 years.

Hershey is the fastest-growing confectionery company in China, and Hershey expects China to become its second-largest market behind the US by 2017. Here are a few key facts about Hershey and China:

• In 2015, the majority of Hershey’s international sales already come from China.
• Hershey’s Kisses brand is the first $100 million brand outside North America.
• Hershey’s plan for China includes a rollout of Brookside Chocolates, distribution into smaller format stores, and acceleration of e-commerce business.

Hershey’s vice president of supply chain, Richard Camacho believes that “e-commerce is the fastest-growing distribution channel in China.” Hershey has mobile Flagship store and online distribution with over 12 third-party websites. Hershey’s e-commerce business is still small, but it grew 60% last year.

To take advantage of e-commerce opportunity, Hershey partnered with key Chinese online retailers like Tmall, Yihaodian, and Jingdong. Hershey contributes 24% of the revenue of the Tmall.com.

But through mergers and acquisitions, other multinational players are trying to capture the share in the market. While Hershey acquired the Chinese chocolate maker SGM (Shanghai Golden Monkey), its peer Nestle (NSRGY) acquired Dongguan Hsu-Fu-Chi Food Co in 2011. Mondelez International (MDLZ) also follows the strategy of acquisitions to expand its business in emerging markets.

After to the slowdown in China’s market in 2015, chocolate performance narrowed expectations. However, Hershey reported YTD (year-to-date) a chocolate retail growth in China of 4.3%, and Hershey still believes in its decision to acquire.

Continue to the next part of this series for a closer analysis of Hershey’s acquisition of Shanghai Golden Monkey.